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Inventory and Related Terms

Updated on: May 25th, 2023


5 min read

Inventories are an asset which includes finished good, work in progress and raw material which are held by a company for the purpose of sales in the near future. It also includes goods purchased that are held for resale and maintenance supplies, consumables which are used in the production process. Inventories are maintained in accordance with the demand, supply, and movement of goods. There are inventory terms which are used in the normal course of business and we shall discuss some of them below:

Sl.NoInventory TermsDetail
1Stock on OrderStock on order is the quantity yet to be delivered for the purpose of production/sales. It means the ordering of new stock to refill the inventory to meet the production/ sales demand
2Safety StockAlso known as buffer stock which is held for unforeseen emergencies. This is the stock maintained as a reserve to meet the demand in case of any mismatch between the actual and forecasted requirement
3Stock ControlIt is the process to ensure appropriate amounts of stock is maintained by the business to meet customer demand without any delay. The main purpose of stock control is to minimize the stock level and thereby reducing the holding cost of inventory
4Stock Out CostStock out is the inventory shortfall which may arise from unexpected demand, ineffective inventory management etc Stock out cost is the cost associated with stock out which is the lost opportunity caused by the exhaustion of the inventory
5Economic Order Quantity (EOQ)EOQ is that size of the stock order which minimizes both the purchasing costs and the inventory carrying costs. It is the optimum quantity of stock to be purchased at one time to reduce the cost related to inventory
6Stock CoverStock cover is the length of time that inventory will last for the current production/ sales usage
7Part NumberPart number is a code which identifies a unique inventory item in a particular industry. A part number is used for reference and generally includes the model number, year of manufacture etc
8Order Lead TimePurchase lead time is the time taken to order and receive goods at the factory. On the other hand, procurement lead time includes the time taken for choosing the vendor, ordering the goods, availability etc up to the time of delivery
9Back OrderBackorder means an order for the stock which is currently out of stock due to insufficient raw materials or production capacity. An important note is that back orders exist only if the customer is willing to wait for the order
10Re-order PointIt is the stock level indicating the time to refill inventory. Re-order point is generally calculated based on the lead time, service level, and the demand forecast. If the inventory is not ordered at this point, it may disrupt the production process
11Obsolete StockObsolete stock is the inventory held by a company for a long period of time and ability to sell it. Such stock would have been retained for a really long period which would have declined its value and not of saleable quality
12Just in Time (JIT)JIT is a strategy followed by companies to reduce the inventory cost. It is part of the inventory management technique which aims at increasing efficiency and decreasing the waste by purchasing goods only as and when required. Its also helps in process simplification, reduction in batch size, parallel processing etc
13Stock Keeping UnitsStock keeping units are unique numbers/letters that are assigned to the products, indicating style, size, colour etc which allows you to track the products easily
14Shelf LifeShelf life is the period of time until which any item can be held in inventory before it becomes unusable. It is more important for the stocks related to food or drugs which deteriorate over time and becomes obsolete quickly
15Dock to StockThis is an arrangement where materials bypass an incoming quality inspection and are moved straight from the receiving dock to the warehouse
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Quick Summary

Inventories are assets used for sales and production, with terms like Stock on Order, Safety Stock, and Stock Control. Economic Order Quantity reduces inventory costs. Stock Keeping Units help track products easily.

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